The Libertarians believe that the FED sets 'the' interest rate. Recessions are thought to be caused by a previous expansion when the interest rate was 'set' too low. The investment caused by lower interest rate is coined 'malinvestment'.
The FED usually only does two things: buys and sell bonds (decreases and increases the private supply of money) and sets the interest rate for loans to member banks for overnight deposits.
Banks are free to actually set whatever interest rates (applicable to whatever state laws) they want. Banks set short term rates close to what the FED charges for overnight deposit - because that is just over cost. But for longer term rates, they can set whatever rate they think is safe. If they anticipate inflation, for example, the long term interest rates will rise. This is the key fact Libertarians ignore.
The fact that during the 80's long term rates were not too high proved that the market did not think there would be much inflation, and hence the FED did not set it's overnight rate too low or buy too many bonds (increase in the money supply was about right).
This is true of much of the modern history of the FED (save for the high inflation of the 1970's) and so proves the Libetarian hypothesis false. Recessions are not caused by previous expansions where the FED 'set' the interest rate too low.